Felipe Céspedes, Luis, Chang, Roberto and Velasco, Andrés 
ORCID: 0000-0003-0441-5062
(2022)
The macroeconomics of a pandemic: a minimalist framework.
Journal of International Money and Finance, 127.
ISSN 0261-5606
Abstract
To analyze the macroeconomics of a pandemic we build a minimalist framework with two essential components. The first is productivity-related: if the virus forces firms to shed labor beyond a certain threshold, productivity suffers. The second component is a credit market imperfection: because lenders cannot be sure a borrower will repay, they only lend against collateral. Expected productivity determines collateral value; in turn, collateral value can limit borrowing and productivity. As a result, adverse shocks have large magnification effects, in an unemployment and asset price deflation doom loop. There may be multiple equilibria, so that pessimistic expectations can push the economy to a bad equilibrium with limited borrowing and low employment and productivity. The model helps identify policies to fight the effects of the pandemic. Traditional expansionary fiscal policy has no beneficial effects, while cutting interest rates has a limited effect if the initial real interest rate is low. By contrast, several unconventional policies, including wage subsidies, helicopter drops of liquid assets, equity injections, and loan guarantees, can keep the economy in a high-employment, high-productivity equilibrium. Such policies can be fiscally expensive, so they are feasible only with ample fiscal space or emergency financing from abroad. Preliminary macroeconomic evidence is consistent with the mechanisms in our model.
| Item Type: | Article |
|---|---|
| Official URL: | https://www.sciencedirect.com/journal/journal-of-i... |
| Additional Information: | © 2022 Elsevier Ltd |
| Divisions: | School of Public Policy ?? SCPP ?? |
| Subjects: | H Social Sciences > HB Economic Theory R Medicine > RA Public aspects of medicine > RA0421 Public health. Hygiene. Preventive Medicine H Social Sciences > HV Social pathology. Social and public welfare. Criminology |
| JEL classification: | E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General H - Public Economics > H8 - Miscellaneous Issues > H80 - General |
| Date Deposited: | 29 Jul 2022 09:54 |
| Last Modified: | 16 Nov 2024 20:09 |
| URI: | http://eprints.lse.ac.uk/id/eprint/115708 |
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